Secretary of the Treasury Henry M. Paulson, Jr. recently released the
"Blueprint for a Modernized Financial Regulatory Structure," the
Department of the Treasury's plan to overhaul America's financial system
in the wake of the housing crisis and the Wall Street meltdown.
Commentators are touting the changes as the most sweeping reforms since
those implemented by President Franklin D. Roosevelt during the Great
Depression.

In his speech announcing the "Blueprint," Secretary Paulson stated that
"the challenge is to evolve to a more flexible, efficient and effective
regulatory framework." Among the short-term changes proposed is the
creation of a new Mortgage Origination Commission designed to regulate
the mortgage industry by evaluating each state's regulation of lenders
and brokers. The report asserts that Federal legislation should
establish uniform minimum qualifications for state licensing of lenders
and brokers and that the Federal Reserve should implement national
mortgage-lending laws. Over the long-term Secretary Paulson wants to
eliminate some of the duplication currently in the system. To do so he
proposes merging the Securities and Exchange Commission, which oversees
the financial markets and is responsible for protecting investors, with
the Commodity Futures and Trading Commission, which regulates the
trading of futures contracts of oil, gold and wheat. He also would
merge the Office of Thrift Supervision with the Office of the
Comptroller of the Currency so that the latter would regulate both
national banks and financial institutions that operate like banks.

While I am not an economist, streamlining bureaucracy to reduce
duplication and waste is generally a good idea, particularly if the
separate bureaucracies govern similar institutions or trades. Where
there should be more cause for concern is with a reactive or impulsive
desire to over-regulate the industry. Secretary Paulson has said he
wants to avoid this, but suggesting that the Federal Reserve issue
national mortgage-lending laws without stating specifically what those
laws should entail and what should be the limit of the Federal Reserve's
power to tamper with the housing market is rather troubling.

There is a tendency in times of financial crisis to look to government
as the solution. Yet government solutions often exacerbate the problem
or permanently limit the free market. What should occur in this housing
crisis is a market correction. In other words, the Federal Government
should let home prices, which were inflated grossly, correct themselves
to more realistic values.

Some economists also have criticized the Federal Reserve for lowering
interest rates so much that inflation may become a serious problem. If
this proves to be the case and the Federal Reserve has over-reacted to
the crisis by lowering interest rates excessively, it would provide
further proof that too much regulatory power should not be vested in one
bureaucracy.

A free market is notoriously difficult to manage and predict because so
many different forces govern it. Yet it has proven to bring the
greatest wealth to the most people of any economic system in history.
Certainly some regulation is needed to govern the human propensity
toward sin and greed. But too much regulation will move us toward a
statist economy. If this happens, the American entrepreneurial spirit
may be stifled in a bureaucratic and legislative quagmire while real
wages decline. And countless historical examples have shown that, if
left to itself, the market does a much better job of correcting itself
than bureaucrats who try to micro-manage prices, coinage, interest rates
or wages. On this subject the words of John Lennon and Paul McCartney
may provide more guidance than reams of Federal Reserve legislation,
"Let it be."